EFFECT OF FOREIGN EXCHANGE RATE ON ECONOMIC GROWTH IN NIGERIA

Abstract

This study examined the effect of exchange rate on gross domestic product (GDP), as a proxy of economic growth with inflation rate, interest rate and trade balance as determinants of the exchange rate. Secondary data from the Central Bank of Nigeria (CBN) Statistical Bulletin collected for a period of thirty-three years, 1990-2023 was used. Ex-post facto research design was applied. While some pre and diagnostic tests were carried out to confirm the integrity of the data and their relatedness in both short- and long-term basis, Autoregressive Distributed lag (ARDL) model was employed in the analysis of hypotheses. It was found that while there is no significant effect of inflation rate on Nigeria’s Gross Domestic product (GDP), interest rate and trade balance have positive effect on Nigeria’s Gross Domestic Product (GDP). This implies that interest rate and trade balance affect economic growth in Nigeria. The study also demonstrates that exchange rate fluctuations is pivotal to the economic growth of Nigeria, other economic variables used in this study exchange rate((EXR), interest rate (INR), inflation rate (INF)and trade balance (TB) may result in a direct effect on the Nigerian economic growth. The study concludes that interest rate and trade balances should be handled with utmost concern by policymakers to avoid unnecessary variations that may inflict unbearable economic hardships on the Nigerian people. The study recommends that government should focus on strategies to improve its trade balance, including promoting exports, reducing reliance on imports, encourage diversification and implement a robust monetary policy aimed at controlling inflation to enhance the living standard of Nigerians.